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Fiscal Consolidation in Americathe Policy Options


									Fiscal Consolidation in America: the Policy Options

Comments to Altshuler & Bosworth

Paola Subacchi
Chatham House (The Royal Institute of International Affairs)

Nomura Foundation, Macro Economy Research Conference
“Fiscal Policy in the Post-Crisis World”
Tokyo, 16 November 2010
What is A&B‟s goal?

Two-fold goal:
• to evaluate the options for fiscal consolidation in future
• to place those options “within the context of a continuing
  tradeoff between the objective of an improved fiscal
  balance and desires to restore the economy to high levels
  of employment
What do A&B discuss?

• Economic outlook and the challenges that it raises for fiscal
  and monetary policy
   – trade-off between budget reduction and support to growth

• Lessons from the international experience with fiscal
  consolidation programmes
• Baseline projection for the US budget outlook
• Options for fiscal consolidation over the medium-term
   – expenditure reduction
   – revenue increases
What do A&B conclude?

• Policy options are limited:
    – monetary policy limited impact
    – Fiscal policy  political constraints both domestically and internationally
      (problems with coordination/cooperation)
• Current budget policies will fast increase the public debt as a share of
• Action to bring back the federal budget into balance will require large
   structural changes in both expenditures and revenues
• The US need to consider a broader range of new revenue sources
This is a „three-papers‟ paper

A few suggestions:
• Focus on economic outlook and challenges for policies
  within the context of global rebalacing, or
• Focus on fiscal consolidation and tax reform in the US and
  discuss lessons from other countries - i.e. Sweden and
  Canada, or
• Draw scenarios based on fiscal consolidation and tax
  reform, and assess the impact on growth
Alternative paths to recovery
Pre-crisis and post-crisis growth trends for the US
and the euro area
Can the US afford to go „solo‟?

• The US is the only major country with a further fiscal
   – Less need to please the “bond vigilantes”: USD as the key reserve
     currency and „safe haven‟
   – But the tools used may not be the most appropriate and risk fuelling
     international tension
   – And potential loss of impact through imports

• A&B suggest that any additional stimulus measures need
  to be temporary and integrated with a coherent long-term
  plan of fiscal consolidation
There are three lessons from the international
• Credible and transparent rules
• Need for an enforcement mechanism
• Flexibility and robustness in the response to unforeseen
The budget outlook (short term)

  Federal Revenues and Expenditures, 1970-2020 (% of GDP)
The budget outlook (long term)

  Projected Federal Program Outlays, 1970-2050 (% of GDP)
The US needs to look at new revenues sources

• Higher revenues within the current framework of the
  individual and corporate income tax
• VAT tax
• Tax on carbon emissions
• Tax reform programme based on the three previous points
Is revenue increasing feasible?

 Policy             Measures             Goal              Feasibility

 Increase           Ind. in. tax rates   little impact     difficult
 revenues the       Corp income tax little impact          difficult
 existing ind and
                    Tax expenditure      good              difficult
 corp income tax

 Adopt VAT          VAT                  complicated       difficult

 Adopt green tax    Tax on carb          Revenues do not difficult
                    emission             go against goal

                    Raise tax on gas good                  difficult
Thank you

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